US Tries To Wrest Control Of Hostess Liquidation As Management Seeks To Pay $1.75 Million In "Incentive" Bonuses

The Hostess bankruptcy liquidation, the result of a bungled negotiation between the company, its equity sponsors, its striking workers, and the labor union, over what has been defined as unsustainable benefits and pension benefits, is rapidly becoming a Ding Ding farce. The latest news in what promises to be an epic Chapter 22 fight is that the judge, pressured by various impaired stakeholders, among which none other than the US trustee, is that the bankruptcy Judge Robert Drain, who has previously presided over such Chapter 11 cases as Loral, RCN, Cornerstone, Refco, Allegiance Telecom, Delphi, Coudert Brothers, Frontier Airlines and Star Tribune, has ordered the company and its unions to seek private mediation to attempt averting what the company has already said is an inevitable unwind of operations.

Per Reuters, "Hostess, its lenders and the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union (BCTGM) agreed to mediation at the urging of Bankruptcy Judge Robert Drain of the Southern District of New York, who advised against a more expensive, public hearing regarding the company's liquidation. "My desire to do this is prompted primarily by the potential loss of over 18,000 jobs as well as my belief that there is a possibility to resolve this matter," Drain said." Sadly, this latest step will almost certainly lead to nothing constructive as it merely extends a status quo which already proved to be unresolvable.

What makes a mediation improbable is that the antagonism between the feuding sides has certainly hit a level of no return:

Several unions also objected to the company's plans, saying they made "a mockery" of laws protecting collective bargaining agreements in bankruptcy. The Teamsters, which represents 7,900 Hostess workers, said the company's plan would improperly cut the ability of remaining workers to use sick days and vacation.

In the off chance that mediation does lead to a reconstruction of the failed company it may ironically benefit from the closeout sale of its products as confused Americans hoarded Twinkies, Ding Dongs and Ho Hos in hopes of selling them on Ebay as collectible items with huge marks up, something we warned previously will fail. Regardless, the firesale will lead to a surge of cash in the company's coffers, which will then lead to a scramble over how it is divided.

Then comes the question of whether or not someone steps up in the liquidation process and buys the company in part or whole. Here we learn that Grupo Bimbo, long expected to be the natural suitor for at least the firm's trademarks and IP, will not participate in said process. Hostess CEO Rayburn said Grupo Bimbo won’t be a potential buyer for the bankrupt baker. “One misconception in the market is that Bimbo would be a buyer and bakery leadership told us in several plants that Bimbo would come in and buy, which is absurd,” Rayburn said in an interview with Bloomberg Television. Rayburn cited Bimbo’s agreement with the U.S. Justice Department to sell some Sara Lee brands in order to complete its acquisition of Sara Lee’s North American bakery business. “Due to antitrust, it would never happen,” Rayburn said.

More to the point, and as we predicted on Friday, if there is an outright purchase of the company, it will be a standalone entity, without its unions: Hostess will draw strategic buyers and private-equity investors for its brands, Rayburn said, without naming potential bidders. The company is “more attractive” to buyers without the unions, he said. In other words, if the Union had hoped that their workers would be retained by the purchasing entity, their dreams just got shattered.

But while the Union may be sad, it is about to add another emotion to its arsenal: blind fury. Because it is here that things get truly surreal. As the US Trustee, a Justice Department official responsible for protecting creditors, disclosed, as part of the wind down of Hostess, wants to pay as much as $1.75 million in incentive bonuses to 19 senior managers during the liquidation.

The process requires “intensive” planning, staffing and funding, the company said. A fire-sale liquidation would damage equipment and result in improper disposal of waste materials.

It’s “not a simple matter of turning off the lights and shutting the doors,” Hostess said in court papers.

The baker estimated that shutting the plants will cost $17.6 million in the next three months. The plants have about $29 million worth of excess product ingredients, Hostess said.

About $6.9 million will be spent to close depots, while $8.8 million will be used to idle retail stores and $8.1 million will go to shutting corporate offices, according to a court filing. Perishable baked goods at retail stores will be sold at going-out-of-business sales, donated to charity or destroyed, Hostess said.

Most importantly, however, is the question how one explains to 18,500 workers who are already out and looking for jobs that the management team which was just as responsible for crushing the company deserves on average $92,000 each in "incentive bonuses, is anyone's guess and one does wonder what safety precautions said management team may have taken to protect from what is certain to be the collective wrath of its former workforce.

Naturally, the immediate outcome of this rather obscene demand, which may fly in a Chapter 11 KERP proposal but hardly is tenable in a liquidation proceeding, is that said US Trustee is now seeking to take control of the liquidation away from the company. As BBG reported earlier, "U.S. Trustee Tracy Hope Davis asked the judge to convert the case to a Chapter 7 from Chapter 11 bankruptcy, based partly on the company’s intent to pay bonuses, and appoint a trustee to supervise the wind-down."

But wait, it gets better: because it is quite likely that should an emboldened US Trustee get her wishes granted, will push to continue operating Hostess as a going concern, potentially with a court appointed, and US Trustee selected management team.

In essence this could result in a stealth nationalization of the junk food maker, which would preserve the jobs of the workers for the time being, but crush the balance of the capital structure, i.e., secured and unsecured creditors.

Impossible, you say? It has happened, to a big extent, before. Recall a certain bankruptcy case of one General Motors, where the claims of creditors were primed by those of the labor unions.

Granted, such a perversion of the bankruptcy process would be historic, but in a country in which everyone is to blame for everything, and in which property rights are becoming a very nebulous concept, we would certainly not be surprised if the US government ends up "bailing out" Hostess by a mandatory flipping the capital structure, over the cries of the company's creditors, further pushing the country into the twilight Banana zone.

Maybe one of the many reasons why "Mexicans can do it cheaper" could be to do with the relative paucity of "Government Regulation" in Mexico.

All the "Multi-Letter" Government "safety" Agencies cost the producer a lot of money (that has to come off the bottom line). Add in local, State and Federal taxation and there are a LOT of "hands in the till" taking their "fair share" of business profits.

Why not go "The Whole Offshore" and have them made in China? Seems the "preferred location" for US and many other Countries shadow manufacture these days.

Same in Australia - nowadays "Proudly Made in Australia" generally means "complicated, technically challenging" parts made overseas, relatively simple, lower skill requirement ASSEMBLY in Australia" - which is not QUITE the same thing is it . . . .

lol @ "Mexicans can do it cheaper" - of course, landlords availing themselves of Section 8 padding to support the monthly rentals that a waged household used to pay will soon find tenants that also do it cheaper, by the dozen, in small homes, "Mexican worker style"

Actually, the US is not trying to do anything here. This is a move pretty much any bankruptcy judge would make before allowing a conversion to a Chapter 7. Obama does not give a shit about any of you and your Twinkies. He could also care less about buying votes, he won't run for anything again. Come to think of it, he couldn't give a shit about what anyone thinks about what he does from here on out. I almost find that prospect more terrifying than a Bernak.

Your'e thinking of the good old days like the 80's and 90's when people could eat the hostess line of goodies and not have to worry about being shunned. Their stuff is really just relics, if you worked in the retail/ convenience store sector you would know that things just don't move like they used to. How do you successfully market packaged fat in todays world of health nazi consciousness?

I do a lot of distressed investing. The first bankruptcy here came about by a combination of old plant, excessive energy costs, the unions and to a degree, the management. If you had better management, the first two things would not have been as big a problem, but they were a problem none the less. The killer was the union work rules the first time around. The bankruptcy I am currently involved in is totally a management fuckup. Others have been fraud. The whole thing is a spectrum. As a matter of fact 100% of all bankruptcies are companies who file bankruptcy. Beyond that, you do not get to say much as the proximate cause.

If it becomes a bailout company where unions rule - I'll never eat another twinkie again. I swear it. I'll eat Entemann's or Little Debbie. I won't support a union shop that got the government to screw the creditors and expect to have a job ad infinity.........

"as the company was preparing to file for bankruptcy earlier this year, the then CEO of Hostess was awarded a 300 percent raise (from approximately $750,000 to $2,550,000) and at least nine other top executives of the company received massive pay raises. One such executive received a pay increase from $500,000 to $900,000 and another received one taking his salary from $375,000 to $656,256."

What part of management agreeing to every damn one of the workplace rules don't you union bashing dimwits understand? As long as management gets the bonuses TODAY, and pays a dividend TODAY, they will agree to anything as long as they can kick the consequence down the road. The time to object is when the contract rules are set, Not five years later when it is management's turn to 'honor' their part of the deal. And the asset stripping 'equity partners' can GFY.

Nothing stops the employees from coming together and taking over the company (purchasing the assets in bankruptcy, perhaps) and operating it themselves according to their business, social, or ethical principles. They can pay themselves whatever they think they are worth, and let's see how that works out. That is essentially what United Airlines did, and look at how well they're doing. Great airline, solid profits, good growth, happy employees, pleasure to fly on, stock paying a dividend. Oh wait ...

I'm gonna love seeing a company that manufactures "food" trying to find qualified machine operators, maintenance personnel, and technicians for less than 10 an hour, especially given current inflation and housing, good luck dumb fucks, hope management knows how to fix hydraulics, let alone tune a machine. Idiots. Durr, IS A BONUS, BONUS!! Shits gonna be epic.

Likely a good chunk of the production well head to northern Mexico regardles of how ultimately buys the rights to the brand after the clusterf@ck bankruptcy is cleared up. There is a lot of nostalgic value in some of these brands and they still have decent market share. Not like they were a product that hasn't been on the shelf & consumed by large numbers of Americans in the past 10 or 20 years.

Good grief guys, go out and learn some bk law and understand what this shit is about. Liquidating a company like this can take a year or two by the time you get through all the shit. There is probably asbestous in some of the old ovens for instance. One of the bigger problems with Hostess and its predecessor is that some of the plant was real old crap. This is not jingle mail by any matter of means. The judge here was doing what judges do. One last shot at not doing a conversion to Chapter 7, if that fails, then convert to Chapter 7. I have played in the bankruptcy sandbox for years. There is nothing especially unusual or excessive going on. Obama is not stealing your Twinkies. But carry on if you wish.

After the government buys the company they will require the product to be distributed in the public schools as a lunch item

they will add some vitamins or not and tell everyone they are now healthy to eat. If they can convince people of global warming convincing people the product is healthy does not seem to be too big a deal

Under the supervision of Michele Obama, Hostess will be required to create a healthy alternative to twinkies. Twinkies shall be replaced by apple sauce filled bananas and will be the only option at vending machines nationwide. There will be a tax levied on the re purposed snack not to exceed 200% of the cost of the product. The revenue from this tax will be applied to efforts to keep the climate from changing ever again.

With this effort citizens will have more freedom while at the same time preventing things like stormy weather.

Any time there is remotely anything mentioning 'unions' at least half of the posts on here go full-on retard and ramble mindlessly about the evils of unions. This was a company that had already entered bankruptcy previously in '04 and has several huge issues/problems since then with the legacy pension and retiree health benefits of the different unions being involved just one of them.

In our Internet age though where everything now has to be 120 characters or less, you need to find a designated bogeyman and paint that message over and over and over again.

If you are on the left, it is the evil 'vulture capitalists.' If you are on the right, it is the evil 'union thugs or parasites.' Not possible that there is plenty of blame to go around and that generally a bankruptcy of a company in one industry has very few/if any comparables to a bankruptcy in another industry.

I guess they could have cut a check to their 18,000 employees for 72 dollars each, lol. Why should I give a rats ass when the central banks are already robbing people of hundreds if not thousands of dollars per year through inflation.